Developments that may impact the flow of the world’s goods and services across borders can have a big impact on the world economy and the earnings of global companies.
There are five trade issues for investors to watch with different timing on when developments might take place: Brexit negotiations, Trump executive orders, Xi-Trump meeting, NAFTA renegotiation, and the RCEP mega-deal.
World trade is steadily rising, as you can see in the chart below, but changing trade agreements may impact its future path.
World trade steadily rising
Source: Charles Schwab, Bloomberg data as of 4/2/2017.
Total world trade is equivalent to more than half of the world's economic output, according to data from the World Bank. So it is easy to see why developments that may impact the flow of the world's goods and services across borders can have a big impact on the world economy and the earnings of global companies.
There are five trade issues for investors to watch with different timing on when developments might take place:
Last week, UK Prime Minster Theresa May announced that Article 50 has been triggered, beginning Britain's two-year withdrawal from the European Union (EU). The EU guidelines for the negotiations need to be approved on April 29, followed by a negotiating mandate for the EU. Donald Tusk, head of the European Commission, made it clear that "significant progress" on the divorce arrangements (such as financial commitments) must be made before trade discussions begin. That means the June 22-23 EU summit may establish a timetable for negotiations with no real talk about trade until after the September elections in Germany, just ahead of the October 19-20 EU summit. But even that may be pushed back.
While no member nation has left the EU before, European negotiations over the past 10 years all have had one thing in common—agreement was only achieved at the last moment. That may mean few concrete outcomes on trade emerge in the coming months and investors may want to tune out the noise and posturing ahead of actual discussions.
Trump Executive Orders
U.S. President Donald Trump signed two executive orders last week tied to trade. They direct the Commerce department to complete a 90 day study of US trade on a surgical, country-by-country, product-by-product basis to look for abuses.
While the 90 day study doesn’t mean conclusions couldn’t be realized early, the study is likely to form the basis of trade actions by the administration and any impactful outcomes are likely to be presented formally after the conclusion of the study leaving the summer as the most likely start of material U.S. trade discussions.
China has a very large trade imbalance with the U.S., as you can see in the chart below. Tied to this imbalance, President Trump tweeted a warning that this week's meeting with Chinese president Xi Jinping would be "a very difficult" one. This echoes tweets in January ahead of his planned meeting with Mexico's President Nieto, who subsequently cancelled his visit to the United States. Xi is determined to travel to the U.S. for his first face-to-face meeting with Trump on April 6-7.
U.S. trade balance by country
Source: Charles Schwab, International Monetary Fund data for 2015 as of 3/15/2017.
Despite the pre-meeting rhetoric, the get-together is likely to be uneventful with specifics awaiting the 90 day review by the U.S. Commerce department. Instead the meeting is more likely to focus on opportunities to expand trade and grow jobs and focus on cooperation rather than conflict. The meeting may gather a lot of media attention, but may not provide much substance on trade.
While President Trump called the North American Free Trade Agreement (NAFTA) a "disaster" during the campaign, it appears the administration is preparing modest changes to the trade agreement. An administration draft proposal being circulated in Congress last week by the U.S. trade representative’s office does not appear to be a dramatic departure from the status quo.
The negotiations likely will take more than a year, but threats to terminate the deal as a way to gain negotiating leverage may periodically grab the attention of investors. Discussions may begin this summer, while further progress on finalizing objectives for the talks is awaiting the confirmation of U.S. trade representative Lighthizer, who will be responsible for the negotiations.
While progress on the trade mega-deal known as the TPP, or Trans Pacific Partnership, has stalled following the withdrawal of the U.S., a rival trade pact is moving forward and is scheduled to be finalized this year. A mega-deal focused on the Asia-Pacific region, the Regional Comprehensive Economic Partnership (RCEP) includes countries that make up 46% of the global population, 40% of world trade, and 30% of world GDP. In early March, negotiators from 16 nations accounting for half the world’s population inched closer to a drafting a treaty.
The U.S. withdrawal from the TPP, a deal that didn't include China, has spurred China to push for speeding up the RCEP negotiations. The RCEP covers intellectual property protections and many other aspects of the TPP, but doesn't include the contentious issues on protecting labor rights or improving environmental standards making the deal less wide-ranging and easier to accomplish. The next meeting where negotiators will seek to make substantive progress is May 2-12 in the Philippines; the markets may welcome news of a breakthrough.
Global stock markets posted solid gains in the first quarter despite worries over protectionism. This may be due in part to the fact that the Trump administration did not label China a currency manipulator on day one, as promised; instead Trump has started his trade agenda by focusing on negotiating changes to NAFTA with Mexico before moving to China and other trading partners. These developments signal a deliberate approach, rather than sudden changes, easing post-election investor worries.
The trade issues are evolving much as we expected in the days following the Presidential election (read: President Trump and Global Trade: How Will Campaign Promises Play Out?). Nevertheless, we will continue to pay close attention to these five issues that hold the potential to shape the direction of global trade and stock markets.